World Bank cancels loan

World Bank cancels loan

Here is another international vote of no confidence in the
credibility of the government of President Abdurrahman Wahid. The
World Bank revealed in a statement put on its website early last
week that it had canceled the second US$300 million tranche of
its $600 million social safety net adjustment loan which was
supposed to have been disbursed before the end of December.

The document did not explain why the decision on the loan
cancellation was only made public more than three months after
the drastic measure was taken. But the penalty seemed to have
been imposed late in 2000 coinciding with the decision of the
International Monetary Fund to delay the release of the third
$400 million tranche of its $5 billion bailout fund for
Indonesia.

Both multilateral institutions usually resort to such a
painful measure only when its borrowing members fall extremely
short of fulfilling most of the conditions attached to their
lending programs. And the conditionality of their loans centers
mainly on the implementation of mutually agreed reform measures.

However, the World Bank's move is especially painful because
the $600 million loan that was approved in May 1999 during the
B.J. Habibie administration was designed as a fast-disbursing,
cash loan allocated especially to protect the poor from the worst
impact of the 1997 economic crisis. In contrast with most other
World Bank loans, the social-safety net lending program did not
require local counterpart funding, a condition that has become
extremely difficult for the government to meet due to its
severely limited budgetary resources.

The World Bank did not explicitly cite a corrupt bureaucratic
system as the main reason behind the loan cancellation, but the
results of its review of the implementation of the first $300
million tranche, which was disbursed in January 2000, implicitly
admitted poor governance as the main factor that prompted the
drastic measure. It noted the slow pace of meaningful change in
institutions and bureaucratic culture which rendered modest the
impact of the aid on the poor.

Since the social-safety net has been on top of the World
Bank's country-assistance strategy for Indonesia since 1998, the
wastage caused either by inefficiency or outright malfeasance in
the implementation of the first $300 million loan tranche must
have been so large and pervasive as to compel the World Bank to
resort to such a drastic measure as halting its top-priority
program.

If the World Bank-funded poverty alleviation program was still
so highly vulnerable to wastage and misuse, despite its
multilayered monitoring and supervision system, then the level
and extent of venality within the bureaucratic machinery must
have been critically high.

Learning from the loss of more than 50 percent of the funds
allocated for the social safety-net program in 1998, which was
implemented entirely by the government, the World Bank's social
safety-net program in 2000 was safeguarded by an overarching
national structure which consisted of a government team, a joint
government and civil society task force and a completely
independent civil society monitoring team.

The innovative combination of government and civil society
efforts to verify, monitor and control the program should have
become the most effective system to ensure the success of the
program. Yet, as the World Bank's painful decision shows, the
program has to be discontinued to prevent greater losses. This
also once again reinforces the findings of most international
surveys that have put Indonesia among the most corrupt countries
in the world.

The World Bank's loan cancellation is a tragedy indeed as it
will deprive more than 50 million poor people from such basic
needs as affordable rice, education and health services as well
as basic infrastructure in rural areas.

What makes the tragedy even more heart-wrenching is the bitter
fact that it was virtually caused by a pathetic administration
that seems simply incapable of making any meaningful progress in
developing a system of good governance with reasonable standards
of accountability.